The current Palestinian leadership is committed to peace with Israel, the Israeli prime minister said today as senior figures discussed a possible division of Jerusalem.

Ehud Olmert said he planned to make every effort to pursue peace with the Palestinian president, Mahmoud Abbas, also known as Abu Mazen, as he laid out his agenda.

"The current Palestinian leadership is not a terrorist leadership," Mr Olmert said. "President Abu Mazen and Prime Minister Salam Fayyad are committed to all the agreements signed with Israel, and I believe that they want to move ahead together with us on a route that will bring about a change in the reality of relations between us and them."

Mr Olmert's positive comments about the Fatah leadership came amid preparations for a US-sponsored Middle East peace conference in Annapolis, Maryland, on November 15.

As Mr Olmert praised Mr Abbas's commitment to a peace deal, senior Israeli officials discussed a possible division of Jerusalem in public, signalling an Israeli shift on one of the most sensitive issues in the Middle East conflict.

In recent weeks, the Israeli deputy prime minister, Haim Ramon, has floated the idea of Israel giving up outlying Arab districts of the city, much to the anger of Israeli hardliners.

Mr Ramon today raised the proposal in radio interviews, but was vague on the extent of Israeli control in the Old City, its holy sites and Arab neighbourhoods in the centre of Jerusalem.

A central Palestinian demand is that their future capital should be established in all of the Israeli-annexed area of the city. Israeli and Palestinian negotiators are supposed to present a joint declaration of principles that would guide negotiators in future peace talks at next month's conference.

The fate of Jerusalem would be central to any peace deal. Israel has long maintained that it would never cede control over any areas of Jerusalem, including the Arab neighbourhoods captured in the 1967 war and annexed. The Palestinians want East Jerusalem, including the walled Old City with key Jewish, Christian and Muslim shrines, as a capital.

Mr Ramon said Israel would not hand over the Old City and neighbouring areas - known as the "holy basin" - yet also spoke of a special arrangement in the Old City. Previous negotiations have raised the idea of turning oversight to an international body.

"I agree that all the Palestinian neighbourhoods except the Arab neighbourhoods in the holy basin ... would be transferred," Mr Ramon told Army Radio.

The Palestinian negotiator, Saeb Erekat, refused to comment on Mr Ramon's proposal, but said there have been no agreements on Jerusalem in preliminary talks so far.

"We haven't started negotiations. It's premature to say anything about these issues," he said.

Mr Olmert's office said that Mr Ramon's comments reflected his own opinion, and not that of the prime minister.

The Old City contains the holiest shrine in Judaism, the Temple Mount, and the third holiest site in Islam, the Al Aqsa mosque. Mr Ramon, a member of Mr Olmert's Kadima party, argued that Israel could only benefit from such an arrangement.

It would no longer have to pay social benefits to tens of thousands of Palestinian residents of Jerusalem and could possibly win international recognition for its annexation of parts of Jerusalem.

Mr Ramon noted that Kadima's two main coalition partners, the centre-left Labour and the hardline Israel Beitenu, both want to hand over Arab neighbourhoods, but disagree on how many.

The leader of Israel Beitenu, Avigdor Lieberman, confirmed in an interview with Israel Radio that he is in favour of handing over some of the neighbourhoods. The debate on Jerusalem reflects a growing Israeli consensus about the need for a division, but disagreement remains on how much of the city to give up.

In a statement to the Commons, the British prime minister, Gordon Brown, said the current talks between Israeli and Palestinian leaders offered the best chance of final status negotiations since 2000.

However, former US diplomats warned the Bush administration last week that it was setting itself up for failure at next month's conference by neglecting to lay the groundwork for a successful meeting of American, Israeli and Arab leaders.

More controversially, the former officials urged the administration to drop its insistence on isolating Syria and Hamas, which seized control of Gaza from Fatah in June.

"Maximising the prospects for a successful meeting entails finding a way to deal with both Hamas and Syria," they argued in a letter sent to the US secretary of state, Condoleezza Rice.